Taps Coogan – December 15th, 2021

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Dr. Ed Yardeni, creator of the highly informative website Yardeni Research and author of ‘In Praise of Profits,’ recently spoke with Bloomberg to describe how the return of monetarism “on steroids and speed” has changed the paradigm for the markets and economy.

 

When asked about a recent article by Paul Krugman repeating the claims that monetarism is no longer a serious theory (monetarism is the idea advanced by Milton Freidman that inflation is ultimately a monetary phenomenon that acts with long and variable lags to changes in money supply), Ed Yardeni noted: 

“Well, I think he was right up until the pandemic… Disinflation was the law of the land for many many years following the Great Inflation of the 1970s. It was things like globalization, and technological innovation, aging demography, and too much debt that all were fundamentally disinflationary. But the pandemic changed all that. It put monetarism on steroids and speed in the form of Modern Monetary Theory. We just had this unprecedented increase in government debt and deficits and all of that was, to a large extent financed by the Central Banks…”

On his outlook for inflation:

“I think it’s going to be 4%-5% for the consumption deflator until the middle of the next year and then I think it does ease back down to 3%-4%. I don’t think it’s going back to 2% anytime soon. I would not be surprised if the Fed deals with that by raising the Fed Funds rate by maybe two, maybe three times. But I think they may also seriously consider raising the inflation target, moving the goal from 2% to 3%.”

On the prospect for a ‘taper tantrum:’

“We’ve had four taper tantrums since 2013. We had one in May 2013, another one in early 2016, one right before Christmas in 2018, and then this one. This one is a work in progress… The big difference is that this time the Fed can’t give the market what it wants which is ‘Okay back off, Don’t taper so much’ simply because the inflation problem is real… It’s going to be pretty hard for them to back off…”

On productivity:

“I don’t think this is going to wind up like the 1970s… I am a big believer that productivity is making a huge comeback and the reason for that is that one of the huge differences between now and the 1970s is that there is no growth in the labor force and that’s related to demography… The labor shortages are not temporary… “

In defense of Capitalism:

“There is this kind of Marxist view out there that if a company is profitable it must be exploiting somebody… I make a distinction between two kinds of capitalism in my book and that’s entrepreneurial capitalism and crony capitalism… Crony capitalism isn’t capitalism. It’s all about using the political system to game the system. I am an entrepreneur myself and I can’t afford a lobbyists so I think that’s the way the distinction between and entrepreneur and a cronyist is whether you can afford lobbyists…”

On his outlook for market:

“I think the best is yet to come for us in terms of prosperity and standard of living. I think technology is going to solve a lot of our problems… We’re not going to get double digit increases in the stock market anytime soon. Earnings peaked on a year over year basis in the second quarter. That doesn’t mean they go down, it just means they grow at a slower pace… “

I couldn’t agree more, particularly about the motion that the Fed may react to inflation by simply raising its inflation target.